Evaluating Caterpillar Stock's Actual Performance

Caterpillar (NYSE: CAT) shares have outperformed the S&P 500 index over the last year, three years, and five years, and by pretty wide margins, too. Perhaps the most surprising outperformance comes over the previous year (58.6% versus 15.7%), not least because it stems from a reason that most investors wouldn't have considered a year or two ago.

A cyclical stock

As the chart below indicates, Caterpillar's earnings, measured here in terms of earnings before interest, taxation, depreciation, and amortization (EBITDA), tend to be highly cyclical. That's understandable, as its core businesses are construction and mining machinery. The former tends to be closely tied to the global economy and infrastructure spending, while the latter fluctuates with mining commodity prices and the willingness of miners to invest in capital expenditures.

These patterns indicate that Caterpillar's EBITDA tends to fluctuate significantly, and so does its valuation, as measured here using enterprise value (EV), which represents market capitalization plus net debt.

It's a classic cyclical stock, its valuation (EV/EBITDA) tending to trough just as EBITDA is about to collapse and to peak just as its EBITDA is about to turn up. This is totally normal behavior, as the valuation anticipates the next move ahead.

CAT EV to EBITDA data by YCharts

What the chart says now about Caterpillar

Continuing this line of thought, and given that Caterpillar's valuation is close to a recent historical high, it follows that the market believes Caterpillar's earnings are about to improve in the coming years.

The optimism stems from enthusiasm over the growth in its power generation equipment business, which includes diesel and natural gas-powered power equipment used as primary and backup power sources for data centers. Additionally, it has recently signed a deal to integrate its turbines and engines with Vertiv's power and cooling solutions for data centers.

While Caterpillar's power generation business accounted for only 15.7% of total equipment sales in the third quarter, it grew by $623 million from the same quarter in 2024, representing a 31% increase. Meanwhile, the rest of Caterpillar's equipment sales grew by $872 million.

Data source: Caterpillar presentations. Chart by author.

A hidden artificial intelligence stock

Investors are probably factoring in substantive growth from Caterpillar's exposure to AI/data center spending as well as the possibility of lower interest rates stimulating construction spending, ongoing infrastructure development, and solid growth in mining machinery sales.

It's enough to have caused substantial outperformance over the last few years.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.